Question 2

How do asset managers and asset servicers plan to operate during this period of uncertainty before implementation of UCITS V Level 2 regulation?

Whilst UCITS V is now live, the Level 2 regulations are not due to be implemented until October 2016. These regulations include details on insolvency rules for depositary banks and also the need to demonstrate independence, both with respect to the depositary, the management company, and the asset manager.

Level 3 guidelines as pertain to remuneration provisions under UCITS V are not expected to apply until 1st January 2017. Regulators are yet to agree on how to apply the remuneration provisions. The FCA has published details on how it will apply, but the French and the Germans are not of the same opinion. These are issues that are still being actively discussed, said Clemetson.

Recognising that the six-month gap between Level 1 and Level 2 regulations under UCITS V was far from ideal, the FCA issued a policy statement that will allow for a transition period.

“I think the mindset has been, ‘We know the principles of what need to be put in place
so let’s do that as best we can, taking account of latest guidance and consultation’. Most law
firms have been drafting agreements on the basis of best interpretation of Level 1 and will go
back and make any final adjustments, if needed, at a later date when Level 2 and updated FCA
rules have crystallized the requirements,” said Painter.

Rutishauser confirmed that at GAM, “We have already implemented Level 1 guidelines in our fund prospectuses using generic language, as it is currently a common approach in the industry.”

The six-month delay might require asset managers to go back to their depositary to renegotiate and sign the depositary agreement, which should not require too much alteration. Of more concern is updating the Operating Memorandum, defining how the asset manager will interact with the depositary.

This is where the issue of independence comes under sharper focus. As such, “it is important to clarify the rules before embarking on a long-term relationship. The same applies for AIFMs when appointing a depositary under AIFMD. Both parties need to be clear on the rules and accept them,” explained Anne-Sophie Minaldo, Partner at KPMG (Luxembourg).

With respect to remuneration, Level 2 regulations have essentially been lifted from AIFMD.

AIFMD states that AIFMs shall comply with the remuneration principles “in a way and to the extent appropriate to their size, organisation and the nature, scope and complexity of their activities.”

When discussing how the remuneration policy affects private equity managers, Jerome Wittamer, Chairman of the Luxembourg Private Equity & Venture Capital Association (‘LPEA’) and Founding Partner, Expon Capital, pointed out that the supervisory authorities recognise that what has been written in the AIFMD rulebook does not necessarily make sense to private equity funds.

“For hedge funds it does but with respect to private equity funds, the authorities have shown a willingness to be more relaxed and accommodative towards the application of the remuneration policy. I can’t predict the future but if the industry does introduce AIFMD II at some stage then I think there could be some changes in terms of the way that private equity and real estate funds are treated,” said Wittamer.

With respect to asset servicers, it is not only the gap between Level 1 and Level 2 regulations that creates a challenge; it is also the fact that different European jurisdictions apply different timeframes to UCITS V. In places like Ireland and Luxembourg it is now live and contracts between depositaries and asset managers have been signed. In France and Germany, they have delayed this by six months, whilst in Italy UCITS V has been running since 22nd July 2015.

For global custodians it is important to be aware of these jurisdictional differences, requiring them to be more prepared in some countries than others.

“Italian asset managers and depositaries have had to comply with the new framework for some time now. They had to sign new agreements and are now operating in compliance with UCITS V. There might be some adjustment regarding the independence issue with respect to Level 2 regulations but it won’t significantly impact the independence rules that are already in place,” commented Angela Bracci, Senior Adviser, Italian Banking Association, Milan.

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